Nov. 5 (Bloomberg) -- Kenya will probably offer investors a
premium to ensure it sells one of Africa’s biggest Eurobonds as
the September terrorist attack at Nairobi’s Westgate shopping
mall drives up borrowing costs.

The bonds, which at the maximum amount will match the
biggest foreign-currency issue in Africa, may yield as much as 8
percent, said Morten Groth at Jyske Bank A/S and Kevin Daly at
Aberdeen Asset Management Plc. That compares with yields of 6.60
percent when Nigeria sold $500 million of 10-year notes in July
and 6.92 percent on $400 million of similar-maturity securities
offered by Rwanda at the end of April.

Kenya needs to spend about $4 billion a year for the next
decade to overcome a lack of infrastructure from roads to rail
that is holding back economic growth, according to the World
Bank. Borrowing costs are rising after the attack on Nairobi’s
Westgate Mall on Sept. 21 by the Somali-based al-Shabaab
militia, which killed 67 civilians and security personnel.

“In the long-term the attacks are negative,” said Groth,
who manages $1.5 billion of emerging-market debt, including
Rwandan and Zambian bonds, from Silkeborg, Denmark. “A large
issue size and the fact that it’s a debut issuer probably would
require a premium.”

The government of East Africa’s biggest economy has said it
may sell $1.5 billion to $2 billion of Eurobonds by January.
That would be the largest single issuance since South Africa,
the continent’s biggest economy, issued $2 billion of 12-year
notes in September, matching offerings in 2009 and 2010.

Hire Talks

Kenya is in talks with JPMorgan Chase & Co. to arrange the
sale, Treasury Secretary Henry Rotich said in an interview on
Oct. 23. The government is also negotiating with Arnold & Porter
LLP, based in Washington, to lead counsel.

The world’s largest exporter of black tea will stick to its
plan to sell the Eurobond because the attack won’t have “any
major impact” on Kenya’s economy, Rotich said. Growth is set to
accelerate to 5.6 percent this year, the fastest pace in six
years, from 4.6 percent last year, he said on Sept. 24.

Kenya, which first considered a Eurobond issuance in 1997,
will use proceeds from the sale to repay a $600 million
syndicated loan issued by Citigroup Inc., Standard Bank Group
Ltd. and Standard Chartered Plc taken last year. It will also
finance the upgrading of rail links between the coastal city of
Mombasa, the site of East Africa’s biggest port, and neighboring
Uganda and Rwanda, along with power-generation projects.

Two Issues

The government may opt to offer $1 billion in its initial
foray into international debt markets and then tap investors
with another issuance at a later date, said Guy Tossou, an
emerging markets fixed-income money manager at FFTW-BNP Paribas
Investment Partners in London.

“Despite the recent tragic events, I don’t think they will
have to pay a huge premium, as the yield will largely depend on
the global market situation when they decide to sell the bond,”
Tossou said in an Oct. 25 interview.

The country has the capacity to borrow as much as $2
billion because its debt levels are low relative to other
countries, the International Monetary Fund said in September.

Standard & Poor’s and Fitch Ratings have a B+ rating on
Kenyan debt. That’s four levels below investment grade and on a
par with Zambia and Cape Verde. It has the equivalent B1 rating
from Moody’s Investors Service.

“If they were to offload $1.5 billion or more in this
market, they would have to pay up about 7.5 percent to 8 percent
for a 10-year maturity,” said Daly, who helps oversee $10
billion in emerging-market assets at Aberdeen, including
Tanzanian and Mozambican debt. “It’s possible they could come
in lower than that, depending on risk appetite.”

‘Credit Negative’

The attack on the Westgate Mall, the worst since 1998 when
al-Qaeda bombed the U.S. Embassy in Nairobi and killed more than
200 people, will dent tourism and is “credit negative” for the
nation, Moody’s said on Sept. 26. Tourism accounts for about
12.5 percent of Kenya’s $37 billion economy, the largest source
of foreign exchange after tea exports.

The violence will probably reduce tourism revenue by $160
million this year, restricting economic growth to 5 percent,
compared with an earlier estimate of 5.6 percent, Charles
Robertson, global chief economist at Renaissance Capital in
London, said in September.

Yields on 10-year Nigerian debt have dropped 86 basis
points, or 0.86 percentage point, since they were sold in July
to 5.74 percent as of 1:20 p.m. in London. Rates on Ghana’s
securities due August 2023 have climbed eight basis points to
8.08 percent since issuance.

Record Sales

Dollar-bond sales from African governments and companies
rose to a record $9.68 billion this year from $6.04 billion in
2012, Megan McDonald, Standard Bank’s head of debt primary
markets, said at a conference in Cape Town Oct. 31. Zambia,
Angola and Mozambique are among sovereign governments planning
Eurobond offers, she said.

“There’s still a lot of liquidity in global markets,”
McDonald said. “That money is attracted to Africa not just from
a yield and diversification perspective, but also because of the
economic-growth story playing out on the continent.”

Yields on African dollar-denominated debt have climbed 131
basis points this year, compared with an average 96 basis-point
increase in emerging-market bonds tracked by JPMorgan Chase &
Co. as the Federal Reserve considers reducing stimulus that has
boosted inflows into developing nations.

The impact of the attack will be offset by Kenya’s economy
being the most diversified in East Africa, Daly said. In the
longer term, it will benefit from the discovery of oil in the
north of the country, he said.

“It’s a good story and we are generally pretty
constructive on Kenya,” Daly said. “But it’s down to the fact
that it’s a big issue size.”